Welcome to the class of HRM
Establishing Strategic Pay Plans
Prof. Hiteshwari Jadeja
After studying this chapter, you should be able to:
1.
List the basic factors in determining pay rates.
2.
Define and give an example of how to conduct a job
evaluation.
3.
Explain in detail how to establish pay rates.
4.
Explain how to price managerial and professional jobs.
5.
Discuss competency-based pay and other current trends in
compensation.
6.
Explain the importance today of broadbanding, comparable
worth, and board oversight of executive pay.
Employee Compensation
All forms of pay or rewards going to employees
and arising from their employment.
Basic Factors in Determining Pay Rates
Employee
Compensation
Direct Financial
Payments
Indirect Financial
Payments
• Direct Financial Payment:
Pay in the form of wages, salaries, incentives,
commissions, and bonuses.
• Indirect Financial Payment:
Pay in the form of financial benefits such as
insurance.
Important Compensation Related Acts in
India
oMinimum Wages Act, 1948
oPayment of Wages Act, 1936
oEqual Remuneration Act, 1976
oCompanies Act, 1956
oPayment of Bonus Act
oPayment of Gratuity Act
oEmployee Stock Scheme (ESOS)
oEmployee Stock Purchase (ESPS)
Corporate Policies, Competitive
Strategy, and Compensation
• Aligned Reward Strategy
– The employer’s basic task:
• To create a bundle of rewards—a total reward
package—that specifically elicits the employee
behaviors that the firm needs to support and achieve its
competitive strategy.
– The HR or compensation manager along with top
management creates pay policies that are
consistent with the firm’s strategic aims.
Compensation Policy Issues
• Pay for performance
• Pay for seniority
• The pay cycle
• Salary increases and promotions
• Overtime and shift pay
• Probationary pay
• Paid and unpaid leaves
• Paid holidays
• Salary compression
• Geographic costs of living differences
Equity and Its Impact on Pay Rates
Forms of Equity
External
Equity
Internal
Equity
Individual
Equity
Procedural
Equity
Addressing Equity Issues
Salary Surveys
Methods to
Address Equity
Issues
Job Analysis and
Job Evaluation
Performance Appraisal
and Incentive Pay
Communications, Grievance
Mechanisms, and Employees’
Participation
Establishing Pay Rates
Steps in Establishing Pay Rates
1
Conduct a salary survey of what other employers are
paying for comparable jobs (to help ensure external equity).
2
Determine the worth of each job in your organization
through job evaluation (to ensure internal equity).
3
Group similar jobs into pay grades.
4
Price each pay grade by using wave curves.
5
Fine-tune pay rates.
The Salary Survey
Step 1. The Wage Survey:
Uses for Salary Surveys
To price
benchmark
jobs
To marketprice wages
for jobs
To make
decisions
about benefits
Sources for Salary Surveys
Sources of Wage and
Salary Information
Employer SelfConducted
Surveys
Consulting
Firms
Professional
Associations
Government
Agencies
The
Internet
Some Pay Data Web Sites
Sponsor
Internet Address
What It Provides
Downside
Salary.com
Salary.com
Salary by job and zip code,
plus job and description, for
hundreds of jobs
Adapts national averages
by applying local cost-ofliving differences
Wageweb
www.wageweb.com
Average salaries for more
than 150 clerical, professional,
and managerial jobs
Charges $169 for
breakdowns by industry,
location, etc.
Paycheck India
and
WageIndicator
www.paycheck.in
Input current salary and use
salary checker
Based on gross earnings.
HT
www.shine.com
Salary by job, designation
Based on gross earnings
moving.com
moving.com
Median salaries for thousands
of jobs, by city
Doesn’t consider factors
like company size or
benefits
cnnmoney.com
cnnmoney.com
Input your current salary and
city, and this gives you
comparable salary in
destination city
Based on national averages
adapted to cost of living
differences
Establishing Pay Rates (continued)
Skills
Step 2. Job
Evaluation:
Identifying
Compensable Factors
Effort
Responsibility
Working Conditions
Job evaluation is a systematic comparison done in
order to determine the worth of one job relative to
another.
Establishing Pay Rates (continued)
Preparing for the Job Evaluation
1
Identifying the need for the job evaluation
2
Getting the cooperation of employees
3
Choosing an evaluation committee
4
Performing the actual evaluation
Methods of Job Evaluation
Analytical
Methods
• Point Ranking
Method
• Factor
Comparison
Method
Job
Evaluation
18
NonAnalytical
Methods
• Ranking
Method
• JobClassificatio
n Method
Job Evaluation Methods: Ranking
• Ranking each job relative to all other jobs, usually
based on some overall difficulty.
• Steps in job ranking:
1. Obtain job information.
2. Select and group jobs.
3. Select compensable factors.
4. Rank jobs.
5. Combine ratings.
TABLE
Ranking Order
1. Office manager
Job Ranking by Olympia Health Care
Annual Pay Scale
$43,000
2. Chief nurse
42,500
3. Bookkeeper
34,000
4. Nurse
32,500
5. Cook
31,000
6. Nurse’s aide
28,500
7. Orderly
25,500
Job Evaluation Methods:
Job Classification
• Raters categorize jobs into groups or classes of
jobs that are of roughly the same value for pay
purposes.
– Classes contain similar jobs.
• Administrative assistants
– Grades are jobs similar in difficulty but otherwise
different.
• Mechanics, welders, electricians, and machinists
– Jobs are classed by the amount or level of
compensable factors they contain.
FIGURE
Example of a Grade Level Definition
This is a summary chart of the key grade level criteria for the GS-7 level of clerical and assistance
work. Do not use this chart alone for classification purposes; additional grade level criteria are in the
Web-based chart.
Source: www.opm.gov/fedclass/gscler.pdf. Accessed May 18, 2007.
Job Evaluation Methods: Point Method
• A quantitative technique that involves:
– Identifying the degree to which each compensable
factor is present in the job.
– Awarding points for each degree of each factor.
– Calculating a total point value for the job by adding
up the corresponding points for each factor.
The Point Method of Job Evaluation
Step 1.
Determine clusters of jobs to be evaluated
Step 2.
Collect job information
Step 3.
Select compensable factors
Step 4.
Define compensable factors
Step 5.
Define factor degrees
Step 6.
Determine relative values of factors
Step 7. Assign point value to factors and degrees
Step 8. Write the job evaluation manual
Step 9. Rate the jobs
TABLE 11–A5
Evaluation Points Assigned to Factors and Degrees
FirstDegree
Points
SecondDegree
Points
ThirdDegree
Points
FourthDegree
Points
FifthDegree
Points
Decision making
41
82
123
164
204
Problem solving
35
70
105
140
174
Knowledge
24
48
72
96
123
Job Evaluation Methods: Factor Comparison
Method
• A widely used method of ranking jobs
according to a variety of skill and difficulty
factors, then adding up these rankings to
arrive at an overall numerical rating for each
given job.
Quantitative Job Evaluation Methods
• Factor Comparison Job Evaluation Method
Step 1.
Step 2.
Step 3.
Step 4.
Step 5.
Obtain job information (A1)
Select key benchmark jobs
Rank key jobs by factor (A1.)
Distribute wage rates by factors
Rank key jobs according to wages
assigned to each factor
Step 6. Compare the two sets of rankings to
screen out unusable key jobs
Step 7. Construct the job-comparison scale
Step 8. Use the job-comparison scale
FIGURE 11–A1
Sample Definitions of Five Factors Typically Used in Factor Comparison Method
1. Mental Requirements
Either the possession of and/or the active application of the following:
A. (inherent) Mental traits, such as intelligence, memory, reasoning, facility in verbal expression,
ability to get along with people, and imagination.
B. (acquired) General education, such as grammar and arithmetic; or general information as to sports, world
events, etc.
C. (acquired) Specialized knowledge such as chemistry, engineering, accounting, advertising, etc.
2. Skill Requirements
A. (acquired) Facility in muscular coordination, as in operating machines, repetitive movements, careful
coordinations, dexterity, assembling, sorting, etc.
B. (acquired) Specific job knowledge necessary to the muscular coordination only; acquired by
performance of the work and not to be confused with general education or specialized knowledge.
It is very largely training in the interpretation of sensory impressions.
Examples
1. In operating an adding machine, the knowledge of which key to depress for a subtotal would be skill.
2. In automobile repair, the ability to determine the significance of a knock in the motor would be skill.
3. In hand-firing a boiler, the ability to determine from the appearance of the firebed how coal should be
shoveled over the surface would be skill.
3. Physical Requirements
A. Physical effort, such as sitting, standing, walking, climbing, pulling, lifting, etc.; both the amount
exercised and the degree of the continuity should be taken into account.
B. Physical status, such as age, height, weight, sex, strength, and eyesight.
Source: Jay L. Otis and Richard H. Leukart, Job Evaluation: A Basis for Sound Wage Administration,
p. 181. © 1954, revised 1983. Reprinted by permission of Prentice Hall, Upper Saddle River, NJ.
FIGURE 11–A1 Sample Definitions of Five Factors (continued)
4. Responsibilities
A.
B.
C.
D.
E.
F.
1.
For raw materials, processed materials, tools, equipment, and property.
For money or negotiable securities.
For profits or loss, savings or methods’ improvement.
For public contact.
For records.
For supervision.
Primarily the complexity of supervision given to subordinates; the number of subordinates is a secondary
feature. Planning, direction, coordination, instruction, control, and approval characterize this kind of supervision.
2. Also, the degree of supervision received. If Jobs A and B gave no supervision to subordinates,
but A received much closer immediate supervision than B, then B would be entitled to a higher rating than A in
the supervision factor.
To summarize the four degrees of supervision:
Highest degree—gives much—gets little
High degree—gives much—gets much
Low degree—gives none—gets little
Lowest degree—gives none—gets much
5. Working Conditions
A. Environmental influences such as atmosphere, ventilation, illumination, noise, congestion,
fellow workers, etc.
B. Hazards—from the work or its surroundings.
C. Hours.
Source: Jay L. Otis and Richard H. Leukart, Job Evaluation: A Basis for Sound Wage Administration,
p. 181. © 1954, revised 1983. Reprinted by permission of Prentice Hall, Upper Saddle River, NJ.
TABLE 11–A1.
Ranking Key Jobs by Factors1
Mental
Requirements
Physical
Requirements
Skill
Requirements
Responsibility
Working
Conditions
Welder
1
4
1
1
2
Crane operator
3
1
3
4
4
Punch press operator
2
3
2
2
3
Security guard
4
2
4
3
1
11
is high, 4 is low.
TABLE 11–A2
Ranking Key Jobs by Wage Rates1
Requirements
Hourly
Wage
Mental
Physical
Skill
Responsibility
Working
Conditions
Welder
$9.80
4.00(1)
0.40(4)
3.00(1)
2.00(1)
0.40(2)
Crane operator
$5.60
1.40(3)
2.00(1)
1.80(3)
0.20(4)
0.20(4)
Punch press operator
$6.00
1.60(2)
1.30(3)
2.00(2)
0.80(2)
0.30(3)
Security guard
$4.00
1.20(4)
1.40(2)
0.40(4)
0.40(3)
0.60(1)
11
is high, 4 is low.
TABLE 11–A3
Comparison of Factor and Wage Rankings
Mental
Requirements
Physical
Requirements
Skill
Requirements
Responsibility
Working
Conditions
A1
$2
A1
$2
A1
$2
A1
$2
A1
$2
Welder
1
1
4
4
1
1
1
1
2
2
Crane operator
3
3
1
1
3
3
4
4
4
4
Punch press operator
2
2
3
3
2
2
2
2
3
3
Security guard
4
4
2
2
4
4
3
3
1
1
1Amount
of each factor based on step 3.
2Ratings
based on distribution of wages to each factor from step 5.
Establishing Pay Rates (continued)
Point Method
Step 3. Group
Similar Jobs
into Pay Grades
Ranking Method
Classification Methods
Establishing Pay Rates (continued)
• Step 4. Price Each Pay Grade—Wage Curve
– Shows the pay rates paid for jobs in each pay grade,
relative to the points or rankings assigned to each
job or grade by the job evaluation.
– Shows the relationships between the value of the
job as determined by one of the job evaluation
methods and the current average pay rates for your
grades.
FIGURE 11–4
Plotting a Wage
Curve
Establishing Pay Rates (continued)
• Step 5. Fine-Tune Pay Rates
– Developing pay ranges
• Flexibility in meeting external job market rates.
• Easier for employees to move into higher pay grades.
• Allows for rewarding performance differences and seniority.
– Correcting out-of-line rates
• Raising underpaid jobs to the minimum of the rate range for
their pay grade.
• Freezing rates or cutting pay rates for overpaid (“red circle”)
jobs to maximum in the pay range for their pay grade.
FIGURE 11–5
Wage Structure
Pricing Managerial and Professional
Jobs
Compensating Executives
and Managers
Base
Pay
Short-term
Incentives
Long-Term
Incentives
Executive
Benefits and
Perks
Pricing Managerial and Professional
Jobs
• What Really Determines Executive Pay?
– CEO pay is set by the board of directors taking into
account factors such as the business strategy,
corporate trends, and where they want to be in the
short and long term.
– Firms pay CEOs based on the complexity of the jobs
they filled.
– Boards are reducing the relative importance of
base salary while boosting the emphasis on
performance-based pay.
Competency-Based Pay
• Competencies
– Demonstrable characteristics of a person, including
knowledge, skills, and behaviors, that enable
performance.
• What is Competency-Based Pay?
– Paying for the employee’s range, depth, and types
of skills and knowledge, rather than for the job title
he or she holds.
Competency-Based Pay
(continued)
Why Use CompetencyBased Pay?
Support HighPerformance
Work Systems
Support
Strategic Aims
Support
Performance
Management
Other Compensation Trends
• Broadbanding
– Consolidating salary grades and ranges into just a few
wide levels or “bands,” each of which contains a
relatively wide range of jobs and salary levels.
– Pro and Cons
• More flexibility in assigning workers to different job grades.
• Provides support for flatter hierarchies and teams.
• Promotes skills learning and mobility.
• Lack of permanence in job responsibilities can be unsettling
to new employees.
FIGURE 11–7
Broadbanded
Structure and
How It Relates to
Traditional Pay
Grades and
Ranges
Other Compensation Trends
(continued)
• Comparable Worth
– Refers to the requirement to pay men and women
equal wages for dissimilar jobs that are of
comparable (rather than strictly equal) value to the
employer.
– Seeks to address the issue that women have jobs
that are dissimilar to those of men and those jobs
are often consistently valued less than men’s jobs.
The Pay Gap
• Factors Lowering the Earnings of Women:
– Women’s starting salaries are traditionally lower.
– Salary increases for women in professional jobs do
not reflect their above-average performance.
– In white-collar jobs, men change jobs more
frequently, enabling them to be promoted to
higher-level jobs over women with more seniority.
– In blue-collar jobs, women tend to be placed in
departments with lower-paying jobs.
Improving Productivity Through HRIS:
Automating Compensation
Administration
• Benefits of Compensation Automation:
– Allows for quick updating of compensation
programs.
– Eliminates costs of formerly manual processes.
– Coordinates centralized compensation budgets to
prevent overages in compensation and raises.
– Can integrate and automatically administer other
pay actions.